Since the economic collapse – and in some other countries way before that – central banks worldwide have been criticized of artificially amplifying stock prices because of their low interest rates, immense easing initiatives and monthly stimulus injections into the markets. This has led numerous financial commentators to call for a bubble in various elements of the stock market.
According to a new study by the Official Monetary and Financial Institutions Forum, central banks across the globe are active participants in the stock market as they are actually allocating money directly into stocks. The study authors are now warning that this could create a devastating effect as it could overheat asset prices.
The private research organization identified investments made by 400 central banks, sovereign wealth funds and public pension funds in 162 countries. Its findings highlighted that these entities have increased their investments in publicly traded stocks by more than $1 trillion. In total, these public institutions hold $29.1 trillion of market investments.
“The buildup of central banking interest in equities is one of the unexpected consequences of the last few years’ fall in interest rates, which has depressed the returns on central banks’ foreign exchange reserves and driven them to find alternative investment targets,” wrote David Marsh, managing director of the Forum, in an op-ed piece published in the Wall Street Journal on Monday.
The study listed the People’s Bank of China as being one of the top investors in stocks. Other top public institutions include the Danish and Swiss central banks.
In Marsh’s article, it is recommended that reforms and heightened transparency are desperately needed, citing Edwin Truman, a former senior Federal Reserve official who is now a senior fellow of the Peterson Institute for International Economics, who wrote:
“One of any government’s major responsibilities is managing the country’s international assets. Reforms are urgently needed to enhance the domestic and international transparency and accountability for this activity — in the interests of a better-functioning world economy.”
Although the Federal Reserve does not purchase stocks, it does acquire Treasurys and mortgage-backed securities that has caused its balance sheet to surpass $4 trillion. It has been tapering its monthly bond-buying quantitative easing program from $85 billion to $45 billion.
When the central bank begins to sell its ever-growing balance sheet then it could pose a serious risk to the financial system. In other words, as Tyler Durden of Zero Hedge puts it, the global equity market has metastasized into one giant Ponzi scheme.